WHEN the Chinese parliament wrote the ''socialist market economy'' into the constitution in April, it also changed all references to ''state enterprises'' into ''state-owned enterprises''. The change of usage, which attracted much less attention than the socialist market economy, will have far-reaching implications for the state sector, the backbone of the economy. It reflects a growing awareness that the Government should divorce itself from management and operation, even though it holds overwhelming stakes in the 3,518 large state industrial enterprises in China. Together with some 7,500 medium-sized state industrial enterprises, the public sector accounts for only 2.5 per cent of the total number of industrial firms, but generates about half of the value of national industrial output. Over the years, about a third of China's state firms have been constantly in the red while another third have been plagued by ''hidden'' debts. And once a new accounting system is adopted in July, the proportion of loss making firms is expected to increase significantly. This will mean a severe challenge to the already strained state coffer which relies heavily on the contribution of state-owned enterprises. The government can no longer manage to make both ends met through backing enterprises, by cutting depreciation rates for example, since it will not be allowed by the new accounting system. Most government officials and enterprise executives seem to believe that the losing trend can be reversed by freeing state industries from centralised control and pushing them into the market. However, some economists are beginning to look deeper into the economic system, and specifically at the ownership of state assets, for the root cause of losses. ''Following 14 years of reform, the vitality of state-owned enterprises has shown certain improvement, but whole state sector is still plagued by a lot of problems, such as low efficiency,'' says Jia Heting, an official with the State Commission for Restructuring Economic Systems. ''In the past, state enterprises were called enterprises owned by the whole people, but actually nobody was responsible for the enterprises' profits and losses. People simply did not care.'' The state sector is facing a major challenge from the private sector, township enterprises and foreign business, which have proliferated during the past decade, Mr Jia warned. It is generally accepted that low productivity in China's industrial sector is attributable to the traditional management system, under which a mandatory plan for output, supplies, delivery, distribution and investment was drawn up by the state. There was also lack of incentive for workers to improve efficiency as there was no close relationship between workers' income and the performance. Accordingly, reforms since 1979 have focused on productivity growth, in particular, the reform of rigid enterprise management. It was hoped that enterprises could be enlivened by granting them greater autonomy, offering more material incentives and imposing more financial pressure. Encouraged by the apparent success of the agricultural production responsibility system, the contract responsibility system was introduced in state-enterprises in the early 1980s as the key element of urban reform. It was introduced in state enterprises in the early 1980s as the key element of urban reform, allowing contracts between enterprises and various levels of administrative organisations and governments to meet agreed targets. The Capital Iron and Steel Works, now known as Shougang, was one of the first companies in China to adopt a 15-year contract production system with the Government. The contract requires it to make an annual profit for the state, increasing by 7.2 per cent a year, in addition to tax payments. Excess profits are retained to fund expansion and modernisation. However, the system has been regarded by some economists as transitional. Chinese Academy of Social Science industrial research centre director Zhou Shulian says: ''I cannot agree with the views that contract responsibility system is the objective of the reform in enterprise operation mechanism. ''The contract responsibility system did play a positive role in our economic reform and development, but it will increasingly become unsuitable for the establishment of a socialist market economy. ''Although contracts are signed on an equal and voluntary basis, at the end of the day the system still fails to change the subordinated role of enterprises to their administrative authorities.'' Mr Zhou also holds that under the contract responsibility system, the ownership of assets cannot be clearly defined, and the goal of making enterprises responsible for their own profits and losses will be difficult to realise. ''From the very beginning of enterprise reform, we have been emphasising the reform of the way of operation without going into the system itself. This is the main reason why progress has been so slow,'' he says. In 1988, the law on industrial enterprises owned by the people was published, the first of its kind on the state-owned industrial enterprises. The law defines explicitly that state-owned industrial enterprises are independent commodity producers and dealers, responsible for their own profits and losses. However, the autonomy provided under the law was not realised and the problem of low efficiency of large and medium-sized state-owned enterprises became more prominent. Since 1991, a number of measures have been adopted to inject vigour into the enterprises. In September 1991, authorities published 20 measures to change the internal operation and external environment of state-owned enterprises. A year later, Beijing published the Rule on Restructuring the Operational Mechanism of State-owned Enterprises, which further expanded the power of enterprises in 14 specific areas such as production, investment, foreign trade, pricing, recruitment, labour and wages. However, it did not take long for vice-premier Zhu Rongji to admit openly that there were difficulties in implementing the rules. Now there appears to be a consensus among economists that reform of the property rights of enterprises should be regarded as the kernel of the current round of reform. The most efficient way to define property rights within enterprises is to introduce a shareholding system. ''If enterprises' property rights fail to be clearly defined, state firms will continue to run at losses,'' says Ma Jiantang, an economist at the Development Research Centre of the State Council. The State Commission for Restructuring Economic Systems is mapping out measures to popularise different kinds of shareholding systems in large and medium-sized state enterprises. ''One of the reasons for introducing a shareholding system is to raise funds from the sale. But the main reason is to take the opportunity to sort out property rights in state-owned enterprises,'' Mr Jia said.